The truth about life insurance
7 May 2008
Many people buy life insurance to provide financial security to their family. If premature death occurs, the policy provides a cash sum to take care of the future financial needs of the family.
Insurance agents are drilled into thinking that they play a “noble” role in safeguarding the future of many families. This is half the truth.
Here is the other half: Many families are being grossly overcharged for the modest financial protection offered by the life insurance policy. After deducting the high expenses, their net savings do not earn a sufficient yield for them to live on during their retirement.
Let me quote a real example. Take the case of a male at age 30 saving $300 a month over 30 years. He is able to secure a sum assured of $100,000 under an endowment policy.
If premature death does not occur (and this represents probability of 95%), he is likely to receive a maturity sum of say $171,000, representing a yield of 3% per annum on his savings over 30 years. The insurance agent says that this looks like a good deal, considering that his family had enjoyed financial security for 30 years.
If the policyholder had invested the same sum of money in a low-cost investment fund that mirrors the investments of the life insurance company, he is likely to earn a net yield of about 5% per annum. At the end of 30 years, this will give an accumulated amount of $239,000.
This investment fund earns $68,000, or 40% more than the proceeds of the insurance policy. This is reflected as the “effect of deduction” in the benefit illustration given to the consumer at the point of sale of the life insurance policy. Most people are not aware about the existence of this figure, let alone understand what it means.
The effect of deduction of $68,000 represents a “reduction in yield” of 2% per annum, i.e. the difference between the net yield of 3% and the gross yield of 5%.
The insurance agent will probably explain that this is the cost of the valuable benefit provided by the policy, namely, the financial security provided to the family for 30 years.
What the agent did not say, which is probably dishonest, is that the policyholder could have bought the same financial security to the family through a decreasing term insurance policy for only one-tenth of the cost, or about $7,000. The low cost term insurance, which is what the agent does not offer to the policyholder, will allow the policyholder to earn $61,000 more over the 30 years.
The remainder of the “effect of deduction” goes to pay for the agent’s commission, the overriding commission to the agency managers, the advertising expenses, the sales incentive trips, the overhead expenses of the insurance company, and the profits for their shareholders.
If the policyholder buys a whole-life policy or a critical illness policy, the “effect of deduction” is higher than that for an endowment policy. Although the coverage is higher and wider, the total cost is still about ten times of the cost of a comparable term insurance plan.
The investment-linked policy is equally bad for the policyholder. I have seen benefit illustrations for these policies where the reduction in yield is 4% or more. If a reduction in yield of 2% amounts to $68,000, a reduction in yield of 4% will more than double the cost. This is taking too much from the unsuspecting consumer. It amounts to daylight robbery.
Here is my advice:
1. Do not buy any high-cost life insurance policy. High-cost life insurance plans are those where the policy combines life insurance protection with savings. Low-cost life insurance policies – term insurance policies – cover protection only.
Examples of high-cost life insurance policies include whole life, endowment, critical illness, education and investment-linked policies, where many months of your premium are used to pay the insurance agent’s commission.
2. If a policy is recommended to you, you should ask about the “effect of deduction” and the “reduction in yield”. If the insurance agent is not able to show these figures, you should stop the discussion as the agent is incompetent or dishonest. Ask the agent to disclose the total amount of commission payable over the first three years of the policy. Remember, the commission comes entirely from your premiums.
3. Find out about the cost of decreasing term insurance to provide the same coverage. Do not ask the same agent, as he or she is likely to quote you a large premium. Call the hotline of another insurance company. If they do not provide a decreasing term policy, you can buy a level term policy for a higher premium.
4. The coverage of $100,000 is probably inadequate for your family. You need to be covered for about five years of your earnings. Most people need $200,000 or $300,000. If you buy decreasing term insurance, you can afford to have higher coverage as the cost is low.
My history in NTUC Income
Some people will point out that during my tenure as chief executive of NTUC Income, I had offered the same life insurance policies that are now being discouraged in this article.
Here is the truth. The policies that were sold during my time have a cost to the policyholder that is less than half of similar products in the market. This is achieved by reducing the agent’s commission and the administrative, marketing and other expenses. These policies give a return on maturity which is 15% to 30% higher than similar products in the market.
This statement applies to the old policies introduced during my tenure. I do not wish to comment on the new policies introduced by NTUC Income after I have left. The consumer should ask about the “effect of deduction” and the “reduction in yield” on these new policies and make their judgement.
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I am expecting a very interesting AGM come at this month. Already the styles of the ex CEO and present CEO are very different. The former engages policy holders, while the latter eschews from even replying to their emails.
I can only surmise the common refrain from the policy holders on that day to be….
“Please don’t cut my annual bonus in my policies! Grrrrr……”
Dear Mr Tan,
Just to make it clear in the 1st place, I am not well versed in financial instruments and am not working in any financial institutions. I am a customer of Income for a long time to come since the 90s.
I would like you to know how I feel about the products and services that Income has provided during the years.
From all your hypes about the products and services in Income during your reign, you stressed on them provides good returns and value. I beg to differ. I had policies from other insurance companies like Great Eastern and AIA as well as unit trusts invested with banks. From a layman terms they are performing and giving better returns then the products that you had provided during your time in Income. A few of your investment products have performed the worst (which i had invested in). Even worst than the bank interest rates. One should wonder as why they had not soared when the market booms. Since then some of the unit trusts had exipred and returned a paltry sum to their investors because of the capital protection.
One may wonder what had happened? Did Income during your reign did not pay enough for its employees or agents to work harder or just enough to feed them without extras? These do not seemed to be the case for other insurance companies. They even provided extra bonus for their policy holders even though their fees are higher and these outshines the fees that i am paying. I do know that a company cannot afford to pay peanuts (not Golden Peanuts) to get gold in return. You pay peanuts you get monkeys. All salary should peg to performance - not say you earn more because you work harder you had to be penalised. I should say Income should not have paid you any salary because you have done so badly.
i’ve seen in your postings that insurance agents or any other marketing agents cannot be paid so much. How do you derive they are being paid too much? I would presume you were being paid too much because your stocks are not performing. Like a company who sells new and sophisticated products, you cannot expect the masses to just know about them without marketing agents or your insurance agents to promote and explain to them. Instead when my unit trusts is going to expire, I had received calls from your staffs to ask me to invest in other products without explaining to me why? I refused and told them get my agent to explain to me.
You kept telling the masses to go direct an skipping the agents to save those few dollars. I’d rather pay for an informed decision. If any thing happened, I can’t get anybody to ask any questions and help cause I did not pay a fee to get my jobs done easier. Going through the company myself will bring me a whole lot of headaches, as you know yourself that it is not so straight forward to make a claim. If you can get any Ah Soh and Ah Peks to just know all these products just by telling them the names, i’ll will 100% go and buy your products.
From my observation, you seemed to be very bitter in leaving Income and had a host of resentment against the company. It does seemed that just when to start to advertise yourself (your pictures everywhere) in the letters that were sent to policy holders, you where asked to leave but Income graciously asked you to resign instead. I remembered that at that time there were alot of commotions about the agents’ commissions and your bickering with some top management staffs.
Best regards
Income customer